Boeing Co. (BA) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Financial statements are unaudited. The filing’s central issue is the worldwide grounding of the 737 MAX, which sharply reduced commercial-aircraft deliveries, earnings and operating cash flow.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $19.98B | $25.15B | $58.65B | $72.79B |
| Operating earnings (GAAP) | $1.26B | $2.23B | $229M | $7.81B |
| Operating margin (GAAP) | 6.3% | 8.9% | 0.4% | 10.7% |
| Net earnings | $1.17B | $2.36B | $374M | $7.04B |
| Diluted EPS | $2.05 | $4.07 | $0.66 | $11.95 |
| Operating cash flow | Not separately provided for Q3 | Not separately provided for Q3 | $(226)M | $12.38B |
For the nine-month period, non-GAAP core operating earnings were a loss of $864M and core EPS was a loss of $1.13; these measures exclude specified pension and postretirement costs. Cash and cash equivalents were $9.76B at September 30, versus $7.64B at year-end 2018. Debt was approximately $24.7B, up from approximately $13.8B at year-end. Shareholders’ equity was negative $4.12B (total equity negative $3.81B). Inventories rose to $73.28B from $62.57B, mainly reflecting aircraft production and suspended MAX deliveries.
Business performance and changes
- Commercial Airplanes: Nine-month revenue fell to $24.79B from $40.97B, and the segment recorded an operating loss of $3.81B versus $5.23B of operating profit. Deliveries totaled 301 aircraft, down from 568. The second-quarter $5.61B charge for estimated customer concessions and other considerations related to the MAX grounding included $500M of insurance recoveries.
- Defense, Space & Security: Nine-month revenue increased to $20.27B from $19.52B; operating earnings rose to $2.58B from $886M, principally reflecting lower development-program charges than in 2018.
- Global Services: Revenue increased to $13.82B from $12.15B, substantially reflecting the KLX acquisition and international government services. Operating earnings rose to $2.01B from $1.80B.
- Cash flow and financing: Nine-month operating cash flow swung to a $226M use from $12.38B provided a year earlier. Boeing attributed the decline chiefly to MAX-related inventory growth, missing aircraft delivery payments and lower customer advances. Financing activities provided $4.34B, including substantial net borrowing. Boeing issued senior notes during 2019 and reported $6.62B of unused revolving credit capacity.
- Backlog: Total backlog was $470.23B, down from $490.48B at year-end 2018, mainly because commercial deliveries exceeded new orders and orders from a customer with liquidity issues were removed or reduced.
Outlook, risks and contingencies
- Boeing assumed regulatory approval for MAX return to service would begin in Q4 2019 and that production would gradually increase from 42 aircraft per month to 57 per month by late 2020. These were management assumptions, not assured outcomes; regulators determine timing and conditions. Boeing said it could not reasonably estimate additional financial impacts from continuing uncertainty.
- The grounding has increased estimated production costs for aircraft in the current 737 accounting quantity by $3.64B during the first nine months of 2019, including $872M in Q3. These increases are expected to weigh on margins in future quarters after deliveries resume. Further delays, production cuts or a temporary production halt could materially affect results and cash flow.
- Boeing identified cracks in 737NG “pickle fork” structures; inspections and repairs were ongoing, and possible future financial impacts could not yet be estimated.
- Management planned to reduce 787 production to 12 aircraft per month for about two years beginning in late 2020, citing trade-related market uncertainty and fewer orders than anticipated. 777X first flight was delayed to early 2020, with first delivery targeted for early 2021.
- Other risks include fixed-price defense development programs, particularly KC-46A, government funding delays or shutdowns, customer credit and financing needs, litigation and investigations connected to the MAX accidents, environmental remediation, and trade tensions. Boeing reported $582M of environmental remediation liabilities; the high end of reasonably possible costs exceeded recorded liabilities by $1.06B.
- The Embraer partnership remained subject to regulatory approvals; after an EU Phase II review began in October 2019, closing was expected in early 2020. A $100M termination fee could apply if antitrust approvals were not obtained.
Important facts for investors to verify
- Actual MAX certification and return-to-service timing, customer delivery schedules, and any change to the company’s production-rate assumptions.
- Subsequent changes to MAX customer concessions, production-cost estimates, inventory, operating cash flow and financing needs.
- Whether MAX-related legal claims, investigations, insurance recoveries or customer negotiations produce additional material charges.
- Recoverability of commercial-aircraft inventory and deferred costs, including 787 and 737 program assumptions, and the credit condition of customers with liquidity concerns.
- Progress and cost exposure on KC-46A and other fixed-price development programs, as well as the 737NG structural inspections and 777X schedule.